PROCEDURES REQUIRED BY LIABILITY
                              INSURANCE COMPANY WHICH RESTRICT
                              DISCOVERY, USE OF THIRD PARTY
                              VENDORS AND REQUIRE REVIEW OF
                              DETAILED BILLING INVOICES BY A
                              THIRD PARTY WITHOUT
                              INSURED/CLIENT'S CONSENT OR

Your letter presented a hypothetical situation and questions
similar to those received recently by another requester.  The
Committee has decided that guidance on the pertinent issues can
best be provided via one combined opinion for the two inquiries. 
The hypothetical situation presented involves a lawyer who
represents clients who are insureds of several  liability
insurance carriers.  The carriers require the attorney to follow
certain billing and litigation management guidelines.  These
guidelines restrict discovery and the use of experts and other
third party vendors.  The guidelines also require pre-approval
for time spent on research, travel and the taking and summarizing
of depositions.  The insureds have not been informed of the use
of litigation management guidelines.

In addition to the litigation management guidelines, the carriers
require the attorney to submit billing statements directly to
outside auditing firms for review and approval.  The insureds
have no knowledge of this submission.  These auditing firms
provide this service to more than one insurance carrier.  The
billing statements provide detailed descriptions of the work the
attorney has performed for the insured.  One auditing firm has
also requested information regarding the amount of the last
settlement offer made prior to suit and the attorney's estimate
of the insured's percentage or degree of liability exposure. 
Examples provided by the auditor of the level of detail to be
provided include: information regarding what was discussed in the
office and by whom, specific issues researched, specific non-
deposition discovery prepared, specific trial work performed, and
the identity of all materials and documents reviewed.  Finally,
the auditor has requested that the attorney attach all his work
product to the billing statements.

Under the facts you have presented, you have asked the Committee
to opine as to the propriety of 1) litigation management
guidelines issued by an insurance carrier that restrict an
attorney's representation of the insured, and 2) the submission
by the insured's attorney of billing statements and information
about the insured's case to an independent auditor.

The appropriate and controlling disciplinary rules relative to
your inquiry are:  DR 4-101, which deals with the preservation of
confidences and secrets of a client; DR 5-106 (B), which states
that a lawyer shall not permit a person who recommends, employs,
or pays him to render legal services for another to direct or
regulate his professional judgment in rendering such legal
services; DR 6-101(C), which states that a lawyer shall keep a
client reasonably informed about matters in which the lawyer's
services are being rendered; DR 7-101(A), which deals with a
lawyer's duty to seek the lawful objectives of his client through
reasonably available means permitted by law and the Disciplinary
Rules, to carry out a contract of employment entered into with a
client for professional services, and to not prejudice or damage
his client during the course of the professional relationship;
and DR 7-101(B), which states that with the express or implied
authority of his client, a lawyer may exercise his professional
judgment to limit or vary his client's objectives and waive or
fail to assert a right or position of his client, and that a
lawyer may refuse to aid or participate in conduct or pursue an
objective which he believes to be unlawful or which is repugnant
or imprudent. See also EC 4-3.

While this Committee has not previously addressed these
particular questions, it has previously analyzed the character of
the relationship between an insured and the attorney hired by an
insurance carrier to represent the insured. Most recently, the
Committee summarized that relationship as follows:

     "[A]lthough paid by the insurer, the lawyer must
     represent the insured with undivided loyalty.  Legal
     Ethics Opinion No. 598 (Approved by the Virginia
     Supreme Court, March 8, 1985).  See also, Norman v.
     Insurance Co. Of North America, 218 Va. 718, 727 (1978)
     (attorney employed to represent insured is bound by the
     same high standards which govern all attorneys in their
     representation of private clients).  Thus the
     insured/client may presume that his attorney has no
     interest which will interfere with his devotion to the
     matter confided to him."

LEO 1661.

That position is mirrored by that in ABA Formal Opinion 96-403,
stating, "[w]hatever the rights and duties of the insurer and the
insured under the insurance contract, that contract does not
define the ethical responsibilities of the lawyer to his client." 
In determining the propriety of an attorney agreeing to
management guidelines as described in the hypothetical, the
Committee considered the carrier to be a third-party payor, whose
limited role is defined by DR 5-106(B).  In the present
hypothetical, the third-party payor (i.e., the carrier) seeks to
limit the scope and/or level of the attorney's representation. 
While DR 7-101 (A) does obligate an attorney to carry out the
legal objectives of his client and to fulfill his employment
contract, DR 7-101(B) also allows an attorney to limit his
client's objectives, but only with the express or implied
authority of the client.  Based on those rules, the Committee has
previously determined that for an attorney to limit the level or
scope of legal services to be provided to a client, the attorney
must have obtained, at the start of the representation, consent
from the client after full disclosure and have determined that
the restriction would not materially impair the client's rights.
LEOs 1193, 1276.  Specifically regarding an attorney hired by an
insurance carrier to represent an insured, the Committee opined
that the attorney must make full and adequate disclosure to his
client insured of any limitation of the scope of the
representation.  LEO 598.  Such disclosure is part of the
attorney's continuing responsibility under DR 6-101(C) to keep
his client informed.

The Florida State Bar has recently opined that an insured's
attorney may not follow an insurance company's case management
guidelines without the full knowledge and consent of the client. 
Florida Ethics Opinion 20591, Dec. 31, 1997.  That opinion
suggested that if the insured's attorney determines that the
insurance company's restrictions are injurious to the client's
case, the attorney could not continue to represent the client
under those circumstances.

In related situations, other bars have expressed concern
regarding improper influence of a third party over the activities
of an attorney.  Specifically, the Ohio Bar rejected the
permissibility of a company established solely to negotiate fees
between attorneys and their clients; the opinion states that such
financial pressure constitutes undue influence by a third party
in an attorney/client relationship.  Ohio Ethics Opinion 97-5. 
The Ohio Bar joins a number of other state bars in finding that a
fixed fee arrangement for an insured's attorney hired by a
carrier could be set so low as to create an impermissible risk
that the carrier would be influencing the attorney to provide
less than adequate representation; thus, an attorney would be
ethically prohibited from agreeing to a such a contract.  See,
Ohio Ethic Opinion 97-7; Oregon State Bar, Op. 1991-98; and
Kentucky Bar Ass'n Op. E-368  (1994), approved and adopted,
American Insurance Ass'n v. Kentucky Bar Ass'n, 917 S.W.2d 568
(Ky. 1996) (banning all fixed fee arrangements for insureds'
attorneys hired by carriers).  See also, New Hampshire Bar Ass'n,
Formal Op. 1990-91/5 and State Bar of Wisconsin, Op. E-83-15
(each allowing fixed fee agreements in this context but
expressing related caveats regarding fees set inadequately low). 

This Committee shares the concern raised by those bars that the
attorney/client relationship must remain free from undue
influence from third parties, such as the insurance carrier in
the present context.  Moreover, this Committee, as highlighted in
the discussion above, has previously established benchmarks for
an attorney seeking to limit the scope or level of service to his
client.  The Committee agrees with the Florida Bar's application
of those principles to the situation of the insured's attorney. 
Accordingly, this Committee opines that it is ethically
impermissible for an attorney to agree to an insurance carrier's
restrictions on the attorney's representation of the insured
absent full disclosure and consent of the client at the outset of
the representation and absent a determination that the client's
rights will not be materially impaired by the restrictions.  

In response to your second question, the Committee believes that
its analysis of the  submission of the information to the
auditing firms must be based on respect for DR 4-101, which
establishes a fundamental aspect of the attorney/client
relationship: proper preservation of a client's confidences and
secrets.  Any audit of attorney's billing practices must in no
way violate that rule.

Previously, the Committee has maintained that an insured's
attorney must follow DR 4-101, even when the attorney is provided
by the carrier. Legal Ethics Opinion 598 (insured's attorney must
not reveal any defense to policy coverage to the carrier if such
information was gained in the attorney/client relationship with
the insured).  However, in other opinions, this Committee has
opined that EC 4-3 allows attorneys to provide limited
information to outside auditors.  See, Legal Ethics Opinions 859,
1016, 1573.  The Committee established three requirements for
such submissions: the information be of the limited nature
contemplated in EC 4-3, that the billing agency be selected with
due care, and that the billing agency be warned to maintain
client confidentiality.  Legal Ethics Opinion 1573.  

The Committee opines that the present situation should be
distinguished from the exception to 4-101 that is, in effect,
carved out by EC 4-3 and those opinions.  In the present
situation, not one of the three requirements established in the
above-cited authority is met.  The information is not of a
limited nature. The information is extensive; its submission to
the auditing firms would involve disclosure of confidential
information regarding both the facts of the insured's case and
the attorney's representation of that insured.  Also, the billing
agency is not selected with due care as it is not selected by the
attorney but by the carrier.  Finally, as the auditing firm is
contracting not with the attorney but with the carrier, the
attorney is in no position to direct the auditing firm to
exercise proper precautions to maintain client confidentiality. 
For these reasons, the Committee opines that the permissible
release of information contemplated in EC 4-3 is not permissible
for the submission of the information to the auditing firms in
the present hypothetical.  

Many other states have reviewed similar auditing arrangements and
found them ethically impermissible due to the absence of full and
adequate disclosure to the client and consent from the client. 
See, Utah State Bar Opinion 98-003; Florida Bar Staff Opinion
20591, December 31, 1997; Alabama State Bar (unnumbered); South
Carolina Ethics Advisory Opinion 97-22; Kentucky Bar Ass'n, KBA
E-404; North Carolina Proposed 98 Formal Ethics Opinion 10;
Louisiana State Bar Association (unnumbered); Indiana State Bar
Ass'n, Opinion 4 of 1998.   These opinions collectively are in
line with the general principle established by DR 4-101 and with
this Committee's history of applying that principle to an
insured's attorney, even where the attorney is provided by the
carrier.  In contrast to above-cited opinions, the Massachusetts
Bar opined that so long as the insured/client had provided
consent to disclose the information to the carrier, that consent
could be interpreted to extend to out-sourcing bill review
activities to outside auditing firms, so long as the auditor
would maintain client confidentiality.  Massachusetts Bar Opinion
Letter (unnumbered),  November 20, 1997.  For the reasons cited
earlier in this opinion for not applying EC 4-3 to the present
hypothetical, this Committee declines to adopt the conclusion of
the Massachusetts Bar on this point.  

The Committee opines that for the insured's attorney in this
hypothetical to submit detailed information regarding the
insured's case to an auditing firm would be ethically
impermissible as the attorney has failed to provide the client
with full and adequate disclosure and has failed to obtain
consent from the client for the disclosure.  Furthermore, the
Committee notes that, pursuant to the attorney's duty of loyalty
to the client, as prescribed by DR 7-101, the insured's attorney
should not recommend that the client provide such consent if the
disclosure to the auditors would in some way prejudice the
client.  See, Kentucky Bar Ass'n, KBA E-404; North Carolina
Proposed 98 Formal Ethics Opinion 10.  

Committee Opinion
November 23, 1998

Approved by the Supreme Court of Virginia
September 29, 1999